Clipped from: https://economictimes.indiatimes.com
The good thing about the monetary policy change is the signal that this is not the time to fret about inflation. While the RBI does raise the possibility of further supply disruptions due to possible lockdown and insufficient production of pulses raising the rate of inflation, it does not see this as an overriding concern.
We shall overcome, says RBI governor Shaktikanta Das, announcing the monetary policy committee’s recommendation to reduce the repo and reverse repo rates by 40 basis points to, respectively, 4% and 3.35%. The markets were not impressed either by the rate cuts or the tinkering announced in debt-servicing norms — extension of the moratorium by another three months and permission for banks to convert the interest dues on loans for the moratorium period of six months into a funded interest term loan, repayable by the end of the fiscal year. The Sensex dipped.
The good thing about the monetary policy change is the signal that this is not the time to fret about inflation. While the RBI does raise the possibility of further supply disruptions due to possible lockdown and insufficient production of pulses raising the rate of inflation, it does not see this as an overriding concern. The overriding concern is negative growth this fiscal.
There are three things about Governor Shaktikanta Das’s prognosis for the economy that send a sceptic’s eyebrows rising all the way into his hairline. One, silence on the scope of fiscal action to alter the economy’s growth prospects. Two, readiness to welcome yet more strong growth in grain production as a sign of economic health. And, three, unshakable faith in the ability of the banks to push money to target recipients, notwithstanding the hard evidence to the contrary.
Let’s take up the central bank’s blind faith in the banks first. As of April 24, the latest date for which data has bene published, bank credit declined by more than Rs 1 lakh crore since April 1, even after the RBI has pushed nearly 8 lakh crore into the banks’ hands, hoping they would step up lending to industry gasping for the oxygen of liquidity.
The RBI tried slashing the reverse repo rate, the interest rate the banks get for depositing money with the RBI, to 3.75%, hoping this would persuade the banks to lend to customers instead of keeping money with the RBI. The banks offer their depositors an interest rate of 2.75% on their saving account deposits and can still make a neat, risk-free return by depositing the money with the RBI, without attracting any criminal investigations of the kind that personnel of the CBI and the enforcement directorate conjure up when they see a banker lending money to a client.
The banks are struggling under a huge burden of non-performing assets and cannot risk yet more of their fresh loans turning bad, as is quite likely in the midst of the worst economic downturn the economy has seen. They are poor intermediaries of savings to industry. In any case, at the best of times, the banks catered to not more than 15% of the credit needs of the micro, small and medium enterprise segment of Indian industry. Just giving more money to the banks in the hope that the banks would lend to industry is a form of pointless self-gratification.
The RBI should, instead, use an arm of the government to purchase bonds issued by companies, non-banking finance companies and microfinance institutions. Let some of the investment be in the fund of funds that the government has promised, to provide equity to small companies. Only by accepting the current inadequacy of banks as lenders to industry can the RBI fashion policy to provide liquidity to India’s economic agents.
Does the promise of higher grain output indicate a favourable economic outlook? The Food Corporation of India is groaning under 70 million odd tonnes of grains. It will procure more wheat and rice from the Rabi harvest. Yet more grain means yet more wastage of scarce resources and perverse incentives in agriculture, tempting farmers into cereals, instead of letting them grow more of the crops India and the world need.
The strangest part of the RBI governor’s statement on the monetary policy is that the contours of economic growth would be shaped by how the lockdown is lifted and how the battle against the pandemic shapes up rather than by vigorous fiscal action. “Assuming that economic activity gets restored in a phased manner, especially in the second half of this year, and taking into consideration favourable base effects, it is expected that the combination of fiscal, monetary and administrative measures being currently undertaken would create conditions for a gradual revival in activity in the second half of 2020-21”, said Mr Das.
In other words, the RBI does not see the administrative and fiscal measures announced by the government so far as anything more effective than the poor growth last fiscal, providing a low base from which it is easier to register fast growth this fiscal, for boosting growth. That is a fair verdict on the fiscal boost, of just about 1% of GDP, but it falls short of coaxing the government to take more decisive expansionary policy.
We are a fatalistic people. We shall overcome. The migrants are overcoming, after all — overcoming callous neglect of their subsistence when the lockdown was set in motion, triggering their march home on foot, by cycle or now on trains and trucks, overcoming the hunger, the heat and the police brutality they encounter on the way, overcoming the flood of crocodile tears coming their way, wave after turbulent wave, and overcoming the SARS Cov2 virus with the hardy resistance they have acquired combating a germ biodiversity few other nations can hope to march. At least most of them are. Governor Das does have a point.
Views expressed are author’s own.